Question

Tanner-UNF Corporation acquired as a long-term investment $240 million of 6% bonds, dated July 1, on July 1, 2018. Company management has the positive intent and ability to hold the bonds until maturity, but when the bonds were acquired Tanner-UNF decided to elect the fair value option for accounting for its investment. The market interest rate (yield) was 8% for bonds of similar risk and maturity. Tanner-UNF paid $200 million for the bonds. The company will receive interest semiannually on June 30 and December 31. As a result of changing market conditions, the fair value of the bonds at December 31, 2018, was $210 million.

Required:
1. How would this investment be classified on Tanner-UNF's balance sheet?
2. to 4. Prepare the journal entry to record Tanner-UNF’s investment in the bonds on July 1, 2018, interest on December 31, 2018, at the effective rate and fair value changes as of December 31, 2018.
5. At what amount will Tanner-UNF report its investment in the December 31, 2018, balance sheet?
6. Suppose Moody's bond rating agency downgraded the risk rating of the bonds motivating Tanner-UNF to sell the investment on January 2, 2019, for $190 million. Prepare the journal entry to record the sale.

Prepare the journal entry to record Tanner-UNF’s investment in the bonds on July 1, 2018, interest on December 31, 2018, at the effective rate and fair value changes as of December 31, 2018. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Enter your answers in millions rounded to 1 decimal place, (i.e., 5,500,000 should be entered as 5.5).)

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No	Event	General Journal	Debit	Credit
1	1	Investment in bondsselected answer correct	240.0selected answer correct	not attempted
		Discount on bond investmentselected answer correct	not attempted	40.0selected answer correct
		Cashselected answer correct	not attempted	200.0selected answer correct
2	2	Cashselected answer correct	7.2selected answer correct	not attempted
		Discount on bond investmentselected answer correct	0.8selected answer correct	not attempted
		Interest revenueselected answer correct	not attempted	8.0selected answer correct
3	3	Fair value adjustmentselected answer correct	6.7selected answer incorrect	not attempted
		Unrealized holding gain—NIselected answer correct	not attempted	6.7selected answer incorrect

Suppose Moody's bond rating agency downgraded the risk rating of the bonds motivating Tanner-UNF to sell the investment on January 2, 2019, for $190 million. Prepare the journal entry to record the sale. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Enter your answers in millions rounded to 1 decimal place, (i.e., 5,500,000 should be entered as 5.5).)

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No	Event	General Journal	Debit	Credit
1	1	Cashselected answer incorrect	270selected answer incorrect	not attempted
		Loss on sale of investmentsselected answer incorrect	13selected answer incorrect	not attempted
		Discount on bond investmentselected answer incorrect	27selected answer incorrect	not attempted
		Investment in bondsselected answer incorrect	not attempted	310selected answer incorrect
2	2	Other-than-temporary impairment loss—I/Sselected answer incorrect	6.7selected answer incorrect	not attempted
		Fair value adjustmentselected answer correct	not attempted	6.7

Answer 1

1)
The securities would be classified as Trading Securities
2 to 4 Journal entries			Amount in Millions
No	Event	General Journal	Debit	Credit
1	1	Investment in bonds	$240.00
		Discount on bond investment		$40.00
		Cash		$200.00
2	2	Cash (3% x $240 Million)	$7.20
		Discount on bond investment	$0.80
		Interest revenue (4% x 200)		$8.00
3	3	Fair value adjustment ($240 - $210)	$30.00
		Unrealized holding gain—NI		$30.00
5)
Investment in Bonds		$240.00
Discount on Bonds:
Original Discount	$40.00
12/31/18 Amortization	-0.8	$39.20
Book Value		$200.80
6)
		Cash	$190.00
		Discount on bond investment	$39.20
		Loss on Sale	$10.80
		Investment in bonds		$240.00
		Unrealized holding gains and losses — NI	20
		Fair value adjustments ($190 - $210)		20